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Earnings optimism helps European shares snap two-day dip

German share price index DAX graph is pictured at the stock exchange in Frankfurt

By Ankika Biswas and Amruta Khandekar

(Reuters) - European shares rose on Thursday as upbeat results eased some worries about a profit hit from higher borrowing costs, while U.S. economic data bolstered hopes of a soft landing.

The pan-European STOXX 600 rose 0.4% after two consecutive days of declines.

Most STOXX 600 sectors were up, led by a 2.2% rise in retailers, followed by financial services and banks which climbed 1.9% and 1.6% respectively.

STMicroelectronics shares jumped 8.2% after the chipmaker beat fourth-quarter sales and earnings expectations, boosting the wider technology sector.

Spanish bank Sabadell soared 11.2% to hit an over three year high on an upbeat full-year outlook, while Finnish telecoms equipment maker Nokia rose 4.0% after beating quarterly operating profit expectations and forecasting higher 2023 sales.

Along with corporate earnings, the market focus is now on upcoming interest rate decisions from the Federal Reserve and the European Central Bank (ECB) next week.

"Earnings reports are better than markets are expecting. The China reopening has lifted the mood and so (when) you put that all together, things are not as bad as perhaps they could have been," said Giles Coghlan, chief market analyst at HYCM.

Data showed the U.S. economy grew faster than expected in the fourth quarter, but momentum had slowed significantly by the end of the year, with higher interest rates eroding demand.

"On balance it (the data) is reasonably positive and it just really puts the focus on the Fed next week. What investors are banking on is that the Fed will announce some kind of pause to come (and) that's what's driving that positive sentiment at the moment around stocks," said Coghlan.

However, the ECB is widely expected to hike rates by 50 basis points next week, with policymakers backing the case for interest rates to keep rising further in order to bring inflation down to the central bank's target.

European equities have rallied this year after sharp declines in 2022 on hopes that major central banks would slow the pace of their interest rate hikes and potentially pause them soon as inflationary pressures ease.

Expectations that the euro zone economy will make a soft landing in 2023 have grown due to China's reopening, a milder winter in Europe and the region's ramped-up energy capacity.

Earnings for STOXX 600 companies are expected to have increased 9.5% in the fourth quarter from a year earlier, down from 10.7% a week ago, Refinitiv data showed.

(Reporting by Ankika Biswas and Amruta Khandekar in Bengaluru; Editing by Anil D'Silva, Sherry Jacob-Phillips and Alexander Smith)